A collection of observations, news and resources on the changing nature of innovation, technology, leadership, and other subjects.

March 05, 2018

Blockchain Killer-Apps

A killer app is an IT application whose value is simple to explain, its use is fairly intuitive, and the application turns out to be so useful that it helps propel the success of a product or service.Spreadsheets and word processing were major factors in the 1980s adoption of personal computers, for example.A decade later, e-mail, and the World Wide Web played crucial roles in the mainstream success of the Internet.While there are a number of strong candidates for smartphone killer-apps, navigation and music are among the most widely used.

Blockchain has been in the news lately, but beyond knowing that it has something to do with payments and digital currencies, most people don’t know what blockchain is or why they should care. A major part of the reason is that we still don’t have the kind of easy-to-explain blockchain killer-apps that propelled the Internet forward.

Blockchain has yet to cross the chasm from technology enthusiasts and visionaries to the wider marketplace that’s more interested in business value and applications. There’s considerable research on blockchain technologies, platforms and applications as well as market experimentation in a number of industries - roughly where the Internet was in the mid-late 1980s: full of promise but still confined to a niche audience.

In addition, outside of digital currencies, -a somewhat exotic topic of interest to a relatively small audience, - blockchain applications are primarily aimed at institutions. And, given that blockchain is all about the creation, exchange and management of valuable assets, its applications are significantly more complex to understand and explain than Internet applications.

The management of information is quite different from the management of transactions.The latter, especially for transactions dealing with valuable or sensitive assets, requires deep contractual negotiations among companies and jurisdictional negotiations among governments.Moreover, since blockchain is inherently multi-institutional in nature, its applications involve close collaboration among companies, governments and other entities.

In my opinion, there will likely be two major kinds of blockchain killer-apps: those primarily aimed at reducing the friction and overheads in complex transaction involving multiple institutions; and those primarily aimed at strengthening the security and privacy of the Internet through identity management and data sharing. Let me discuss each in turn.

Complex Transactions Among Institutions

“Contracts, transactions, and the records of them are among the defining structures in our economic, legal, and political systems,” wrote Harvard professors Marco Iansiti and Karim Lakhani in a 2017 HBRarticle.“They protect assets and set organizational boundaries. They establish and verify identities and chronicle events.They govern interactions among nations, organizations, communities, and individuals. They guide managerial and social action. And yet these critical tools and the bureaucracies formed to manage them have not kept up with the economy’s digital transformation. They’re like a rush-hour gridlock trapping a Formula 1 race car. In a digital world, the way we regulate and maintain administrative control has to change.”

With blockchain, “every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared…Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction.”

Blockchain holds the promise to transform the finance industry and other aspects of the digital economy by bringing one of the most important and oldest concepts, the ledger, to the Internet age.Ledgers constitute a permanent record of all the economic transactions an institution handles, whether it’s a bank managing deposits, loans and payments; a brokerage house keeping track of stocks and bonds; or a government office recording the ownership and sale of land and houses.

Over the years, institutions have automated their original paper-based ledgers with sophisticated IT applications and data bases.But while most ledgers are now digital, their underlying structure has not changed. Each institution continues to own and manage its own ledger, synchronizing its records with those of other institutions as appropriate, - a cumbersome process that often takes days.While these legacy systems operate with a high degree of robustness, they’re rather inflexible and inefficient.

In August of 2016, the WEF published a very good report on how blockchain can help reshape the financial services industry.The report concluded that blockchain technologies have great potential to drive simplicity and efficiency through the establishment of new financial services infrastructure, processes and business models.

However, transforming the highly complex global financial ecosystem will take considerable investment and time.Itrequires the close collaboration of its various stakeholders, including existing financial institutions, FinTech startups, merchants of all sizes, government regulators in just about every country, and huge numbers of individuals around the world.Getting them to work together and pull in the same direction is a major undertaking, given their diverging, competing interests.Overcoming these challenges will likely delay large-scale, multi-party blockchain implementations.

Supply chain applications will likely be among the earliest blockchain killer-apps, increasing the speed, security and accuracy of financial and commercial settlements; tracking the supply chain lifecycle of any component or product; and securely protecting all the transactions and data moving through the supply chain.The infrastructures and processes of supply chains are significantly less complex than those in financial services, healthcare, and other industries and there are already a number of experimental applications under way.

A recent WSJ CIO Journal article noted that blockchain seems poised to change how supply chains work. The article cites examples of projects with Walmart and British Airways where blockchain is used to maintain the integrity of the data being shared across the various institutions participating in their respective ecosystems. Earlier this year IBM and Maersk announced a joint venture to streamline operations for the entire global shipping ecosystem.Their joint venture aims to apply blockchain technologies to the current stack of paperwork needed to process and track the shipping of goods.Maersk estimates that the costs to process and administer the required documentation can be as high as 20 percent the actual physical transportation costs.

Identity Management and Data Sharing

The other major kind ofblockchain killer-apps will likely deal with identity management and data security.

From time immemorial, our identity systems have been based on face-to-face interactions and on physical documents and processes.But, the widespread success of the Internet in the 1990s has now led to a world primarily governed by digital data and transactions.This transition has significantly accelerated over the past decade with the advent of billions of smartphones, tens of billions of IoT devices and huge amounts of data, all now connected by the Internet.

As we move from a world of physical interactions and paper documents, to a world primarily governed by digital data and transactions, our existing methods for protecting identities and data are proving inadequate. Internet threats have been growing. Large-scale fraud, data breaches, and identity thefts are becoming more common.Companies are finding that cyber-attacks are costly to prevent and recover from.The transition to a digital economy requires radically different identity systems.

Fundamentally, the Internet is a general purpose data network supporting a remarkable variety of applications. A major reason for the Internet’s ability to keep growing and adapting to widely different applications is that it’s stuck to its basic data-transport mission, i.e., just moving bits around.The Internet has no idea what the bits mean or what they’re trying to accomplish.That’s all the responsibility of the applications running on top of it.Consequently, there’s no one overall owner responsible for security, let alone identity management, over the Internet.These important responsibilities are divided among several actors, making them significantly harder to achieve.

Blockchain technologies should help us enhance the security of digital transactions and data, by developing the required common services for secure communication, storage and data access, along with open source software implementations of these standard services, supported by all major blockchain platforms, such as Hyperledger and Ethereum.

Identity is the key that determines the particular transactions in which individuals, institutions, - and the exploding number of IoT devices, - can rightfully participate, as well as the data they’re entitled to access. But, our existing methods for managing digital identities are far from adequate.

As explained in this excellent 2016 WEF report, identity is essentially a collection of information or attributes associated with a specific individual, institution or IoT device.In general, the needed attributes to validate an identity are siloed within different private and public sector institutions, each using its data for its own purposes.To reach a higher level of privacy and security we need to establish a trusted data ecosystem, which requires the interoperability and sharing of data across the various institutions involved.The more data sources a trusted ecosystem has access to, the higher the probability of detecting fraud and identity theft. However, it’s not only highly unsafe, but also totally infeasible to gather all the needed attributes in a central data warehouse.Few institutions will let their critical data out of their premises.

MIT Connection Science, - a research initiative led by MIT professor Sandy Pentland, - has been developing a new identity framework that would enable the safe sharing of data across institutions.Instead of copying or moving the data across, the agreed upon queries are sent to the institution owning the data, executed behind the firewalls of the data owners, and only the encrypted results are shared. MIT Connection Science is implementing such an identity framework in its OPAL initiative, which makes extensive use of cryptographic and blockchain technologies. A number of pilots are underway around the world.